FASBs complex loss accounting change warrants extra time, insurer group says

By Maura Webber Sadovi for CFODive.com

• The American Council of Life Insurers has joined the Securities Industry and Financial Markets Association— a powerful trade group that represents broker-dealers, investment banks and asset managers — in asking the Financial Accounting Standards Board to extend the public comment period on a proposed change of how companies report credit losses.

• ACLI’s Mike Monahan, senior director of accounting policy for the insurers’ trade group, is asking the standard-setting board to extend the current comment period deadline to Nov. 15 from Aug. 28, noting that the current period coincides with quarter-end reporting for members, a busy time for life insurers who will not be able to focus on the matter until after mid-August when 10-Qs are issued despite the expected credit loss impairment being an important topic for life companies. 

• For a less complex proposal, that comment time for the accounting standards update might be enough, “but the Proposed ASU impacts CECL accounting, which was a significant new standard for the life insurance industry. In addition, it introduces a new Purchased Financial Assets (PFA) concept that is of great interest to our members, as we believe it will address a key weakness in the existing CECL framework,”Monahan wrote in the July 28 letter addressed to FASB Technical Director Hilary Salo.

The current expected credit losses standard, known as CECL, grew out of a FASB effort to encourage timelier reporting of losses after the 2008 financial crisis prompted concerns about delays in companies reporting deteriorated asset values. The standard went into effect for the country’s largest banks in mid-December 2019 but was viewed by critics as onerous because it required banks to set aside reserves for their entire book of loans based on estimated losses for the full life of those loans. 

The proposed change is aimed at addressing those complaints that the current accounting rules actually make banks report more losses when they buy performing loans versus loans that show signs of deteriorated credit quality, CFO Dive previously reported. 

Under current generally accepted accounting principles, there are effectively two models for reporting such assets, depending on whether the assets are deemed healthy or deteriorated. With the new proposal, there would be one “gross up” accounting model used under which there would be no credit loss recorded on acquisition. 

The life insurer group’s request follows a similar ask made by SIFMA earlier last month. The FASB is expected to review comments that come in both during the comment period in the fourth quarter as well as those received before the Aug. 28 deadline, a spokesperson said.The spokesperson declined to comment directly on whether the public comment period could be extended. 

The CECL matter is one of a number of changes to accounting standards that the FASB has on their docket, including new guidance that will affect how companies account for crypto assets and changes that will require more explicit breakdowns on the income taxes corporations pay that some say will “change the game” in terms of what companies must disclose publically.

Last week, the board opened up the public comment period on its proposal that would require companies to break out expenses for employee compensation, depreciation, intangible asset amortization and inventory in the notes to their financial statements. In January, board member Gary Buesser called the effort “the most important project that we’re working on from an investor perspective by a factor of ten,” CFO Dive previously reported.

Monahan did not respond to a request for comment on the letter he penned for ACLI to FASB.